12 February 2014

IMF: EU - Detailed assessment of implementation of ECB observance of the CPSS-IOSCO responsibilities of authorities for FMI

This assessment finds i.a. that the ECB should be entrusted to coordinate the Eurosystem oversight function, in order to ensure that international principles for FMIs are consistently enforced throughout the euro area.

Executive Summary

The oversight framework of the European Central Bank (ECB) is comprehensive. The ECB has developed a wide-ranging oversight policy, including quantitative and qualitative criteria to identify, monitor and remedy any potential systemic risks related to financial market infrastructures. It has also developed oversight standards covering a broad range of infrastructures, service providers and payment schemes within the euro area (EA). Furthermore, it has extensive oversight cooperation with a wide range of authorities both at the European level and globally. Within the European Union (EU), the ECB has been a driving force to promoting stability and integrating financial infrastructures. Globally, the ECB is deeply involved in shaping the regulatory framework for financial market infrastructures (FMIs) by assuming the leadership in developing new principles. It is also involved in several global cooperative oversight arrangements covering globally critical payment systems, posttrading FMIs, and the service provider SWIFT.

The ECB should be entrusted to coordinate the Eurosystem oversight function to ensure that international principles for FMIs are consistently enforced throughout the EA. The regulation and oversight of systemically important FMIs has differed across the EA with potential contagion systemic risk affecting the stability of the EA financial system. The adoption of the PFMIs as legally binding is a step in the right direction. However, these principles are not sufficiently detailed to ensure a uniformed and harmonised implementation across the EA, since their enforcement for post trade FMIs will be conducted by national competent authorities on a decentralised basis (except for trade repositories, for which the supervisory responsibility lies with ESMA). Currently, the ECB is the lead overseer for payment systems, including TARGET2, EURO 1, STEP 2 and CLS (as concerns the settlement of euro transactions), but not for systemically important post-trade FMIs with crossborder reach. Therefore, there is merit in entrusting the ECB with responsibility to ensure that these principles are consistently enforced throughout the EA. Assuming such a role would strengthen financial stability across the EA by ensuring EA-wide policy objectives, harmonised regulation and consistent implementation.

The ECB should rely more on its power to issue legally-binding corrective action to effectively enforce its oversight responsibilities. To implement its oversight responsibilities, the ECB currently relies mainly on ‘soft’ tools and measures such as moral suasion, publication of oversight assessments, public statements, and cooperation with other authorities. These tools have worked so far, but with more demanding oversight standards this may not be effective in all circumstances in forcing the system’s operators to promptly address potential deficiencies. The ECB should rely more on legally binding corrective action to effectively enforce its responsibilities, including imposing sanctions, penalty, suspending some operations or services, etc. As it does not have an exclusive mandate over post-trade FMIs, the ECB should coordinate its corrective measures with the relevant securities regulators and banking supervisors. Furthermore, the ECB should be actively involved in any EU legislation addressed to FMIs, as it would affect the effectiveness of its oversight responsibility.

Recognise the role of the ECB/Eurosystem as central bank of issue for the regulation and oversight of all types of post-trade FMIs. The role of the ECB/Eurosystem as central bank of issue of the euro is recognised in relation to CCP regulation and oversight under EMIR. In line with the CPSS-IOSCO Responsibilities, the ECB role should also recognised as central bank of issue for the regulation and oversight of central securities depositories (CSDs), securities settlement systems (SSSs) and trade repositories (TRs).

The ECB’s oversight role is effectively structured and organised, but further clarity on the separation between its roles as service provider and overseer is warranted. The operation and oversight functions are hosted by separate Divisions within the same Directorate General and, while entrusted to two different Working Groups, treated within the same Eurosystem’s committee (in clearly separated agenda items, which may meet in different compositions and for which there are separate mailing lists and access to documents for oversight and operation). The two functions report to separate members of the ECB Executive Board. To avoid any potential or appearance of a conflict of interest, consideration could be given to providing further clarity to the public on the separation between the operation function and oversight function, aimed at enhancing transparency and accountability.

The ECB’s oversight capacity should be strengthened. The ECB oversight team has the responsibility to define the Eurosystem’s strategy and policy, develop rules and guidance, coordinate the Eurosystem works, and contribute to the works of international fora. In addition, the ECB will soon participate in several EU colleges for central counterparties (CCPs). In order to implement the new risk-based approach in a credible way and be able to contribute actively to the works of European and international fora, the ECB needs to strengthen the capacity and the skill of its staff. ECB oversight staff should be significantly increased.

Full assessment

© International Monetary Fund